Our view: We believe the Q1/24 results and management updates are supportive of our positive thesis for the shares. In particular, we highlight AltaGas' disclosure that it has secured tolling agreements covering 56% of its expected LPG exports as of Q2/24, which we believe has positive implications for the stability of earnings and with that, a higher valuation. We expect AltaGas to deliver annual growth at the high-end of its Canadian midstream and utility peers, a payout ratio that is superior to both its midstream and utility peers, and a deleveraging plan that should result in debt/EBITDA of roughly 4.5x.
Key points:
Increased tolling contracts help improve Midstream stability. AltaGas highlighted that 56% of its expected Global Exports volumes will be covered by tolling agreements starting in Q2/24. In addition, the company has financial hedges in place that result in roughly 90% of its remaining 2024 expected Global Exports volumes being tolled or financially hedged.
REEF: A positive FID appears to be on the horizon. Based on "active negotiations" with potential customers that cover over 100% of REEF's capacity, the commercial aspects of the project are "no longer a gating item" to reach a positive final investment decision (FID). Pre-FID work appears to be going smoothly with 85% of the site preparation being complete with no surprises from a geotechnical perspective. We think the company is likely to make a positive FID on the project in Q2/24.
Modest increase to our 2025 EPS estimate. In 2024, we have increased our EBITDA estimate to $1.751 billion (up from $1.739 billion), but we expect that to be offset by higher interest expense at levels consistent with Q1/24 resulting in no change to our EPS estimate. For 2025, we have raised our EBITDA estimate to $1.864 billion (up from $1.843 billion), which results in an increase in our EPS estimate to $2.29 (up from $2.26). While we still anticipate higher interest expense in 2025 versus 2024, we have incorporated interest rates for new and refinanced debt at levels more consistent with the company’s recent medium-term note financings.
Valuation: Increasing our price target to $34.00 (up from $32.00) to reflect a greater degree of tolling contracts (i.e., more stable Midstream results). Following on the commentary in our March 10, 2024 report (please click here) that achieving 60%+ contracting could drive a 1x improvement in our Midstream valuation, we believe AltaGas is well on its way to achieving that target given the level of tolling to date (i.e., 56% as of Q2/24). With that, we have increased our price target driven by a higher Midstream valuation range of 11-12x EBITDA (up from 10-11x) used in our sum-of-the-parts valuation (please see Exhibit 7).